Japan Price Barometer Points to Deflation Risk This Summer

(Bloomberg) -- The inflation outlook is looking dismal for the Bank of Japan as cheaper oil and falling mobile phone charges threaten to push price growth toward zero by mid-summer.

Japan Price Barometer Points to Deflation Risk This Summer

The Bloomberg Inflation Barometer, which draws on eight drivers of prices, points to a sharp slowing in the months ahead as lower oil costs feed their way into electricity bills. Over the past eight years the barometer has shown a 0.84 correlation with consumer prices six months into the future.

Mobile phone carriers could complicate the BOJ’s quest to revive inflation as they come under political pressure to lower charges further. And making matters worse, free education measures planned by the government are already projected by the BOJ to shave another 0.3 percentage point from inflation later in the year.

Flat-lining of prices would heap pressure on the central bank to take action or justify its decision not to. Any softening in the yen, further wage gains or jump in oil prices could still help the BOJ stick to its view that temporary factors don’t warrant an immediate response.

“The inflation barometer shows a downside risk for core inflation before a sales tax hike slated for October,” says Bloomberg Economics’ Yuki Masujima. “We’ll be watching to see how risks to Japan’s corporate sector -- such as the U.S.-China trade war and potential negatives for business in Europe from politics, including Brexit -- impact the domestic labor market and prices.”
Japan Price Barometer Points to Deflation Risk This Summer

The BOJ is trying to generate 2 percent inflation and has pledged to continue its stimulus program until its goal is achieved.

The central bank has already slashed its inflation forecasts for the fiscal year starting in April to 0.9 percent from 1.4 percent. But even this forecast looks overly optimistic.

While Japan’s three biggest mobile phone carriers say they have already lowered prices by at least 30 percent in the last year, the government has called for reductions of 40 percent, an outcome that could shave 0.9 percentage point off overall price growth.

Bloomberg News compiled and weighted eight factors that feed into or give a leading indication of price direction in Japan. It uses a 21 working day average of WTI spot oil versus a 63 working day average six months earlier and a 21 working day average for the yen versus the same average a year earlier. It also takes the Cabinet Office’s output gap, year-on-year changes in base wages, business sentiment from the BOJ’s Tankan diffusion index, the Economic and Social Research Institute Japan’s index of Consumer Confidence, the running three-month average of year-on-year percentage changes in retail sales and year-on-year changes in mobile phone charges.

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